Monetary and macroprudential policy interactions in a model of the euro area

We use the two-country euro area model developed by Quint and Rabanal (2014) to study policymaking in a monetary union. We focus on: 1) a two-policymaker setting where there is strategic interaction between a single monetary authority and an EMU-level macro-prudential authority, and; 2) a three-policymaker setting where there is strategic interaction between a single monetary authority and two regional-level macroprudential authorities. In the former, price stability and financial stability are pursued at the area-wide level, while in the latter each macro-prudential authority adopts region-specific objectives. We compare cooperative and noncooperative equilibria in simultaneous-move and leadership environments, each obtained assuming discretionary policymaking. In the two-policymaker setting, we find that the gains from either the monetary authority or the macroprudential regulator having a first-mover, or leadership, advantage are somewhat limited, and the most favorable outcome is achieved under cooperation where both policies are formulated and conducted simultaneously. In the threepolicymaker setting, we find that delegating macroprudential policy to regional macroprudential regulators plays an important role in achieving regional stability.